Source 5

Following Russia’s incursion into Ukraine in late February, the U.S., Allies, and partners inflicted punishing sanctions on Russian financial institutions holding at least 80% of the country’s banking assets, and the consequences don’t stop there. More than $50 billion in exports to Russia have been restricted to destabilize the Russian economy and military. The U.S. and others have blocked imports of Russian-origin oil, gas, or coal products, and Russian vessels have been banned from Canada, Britain, and countless other ports worldwide.^9,10 In addition, 5 of the world’s six largest container shipping lines have slashed or eliminated service to Russian ports, effectively cutting Russian port activity by at least 40%.²

In another devastating blow, the Russian Maritime Register of Shipping (R.S. Class) was added to the E.U.’s financial sanctions list in early March. Shortly thereafter, the International Association of Classification Societies (IACS), a highly-respected global organization dedicated to international shipping safety and regulation, voted to remove the R.S. Class from their membership in response to the widening impact of applied sanctions.^2,6 With a confirmative vote from at least 75% of IACS members on March 11th, the eviction was effective immediately.¹

RUSSIA’S OUT OF THE IACS – WHAT’S HAPPENING NOW?

Why does that loss of membership matter? Classification societies, including the IACS, ensure that ships are seaworthy, and certification is essential for obtaining insurance and entry into ports worldwide.³ More than 90% of the global merchant shipping tonnage is classified by IACS member societies.⁶ Other major shipping organizations are also monitoring the situation closely. While none have removed Russian members so far, Russia’s withdrawal from the IACS is likely to expedite the removal of Russian shipowners from additional IACS class societies, which will further isolate the country’s ability to trade internationally.⁴ In many cases, insurance coverage also depends on a vessel’s class. Any change in classification for a vessel typically requires shipowners to either renew or obtain alternative insurance coverage; however, if classification is provided through a non-IACS society, coverage options are severely limited, especially in light of current global reluctance to engage with Russian entities.

Because ships without valid classification can’t enter ports, transactions, and shipments involving Russia - even those already in progress before sanctions hit - face significant hurdles around receiving, delivering, and paying for goods and services. When it comes to shipping snarls, the largest impacts are being felt nearest the conflict, in the Black Sea and the Sea of Azov. So far, more than 100 ships are stuck in Ukrainian ports, leaving them vulnerable to missile strikes, and the International Maritime Organization (IMO) has confirmed there is serious concern that seafarers in the area could become collateral damage during the military crisis.⁵ Since the conflict began, many European terminal operators have refused ships carrying Russia-bound cargo, and hundreds of containers have started piling up at others, including the Netherlands’ Port of Rotterdam - Europe’s largest seaport. As containers stack up, they require time-consuming customs inspections to confirm they don’t contain contraband items such as semiconductors or airplane components. While the logjam isn’t yet disastrous, preventing further congestion means more port operators are refusing ships carrying any cargo to Russia. At the same time, many European companies are avoiding shipping goods to Russia in light of sanctions that continue to change by the day.⁵

CLIENTS MUST WATCH: CLASSIFICATION CLAUSE, CANCELLED WAR COVERAGE, AND SANCTIONS

The situation across the Black Sea is both fluid and complex, requiring that shipping clients fully understand their insurance provisions and pay attention to coverage changes to stay ahead. Standard marine cargo policies include a ‘Classification Clause’ to ensure that clients utilize seaworthy vessels that are appropriately registered with an IACS member society. Using vessels registered with a non-IACS society can have serious consequences, including exclusion from insurance coverage.

Marine cargo policies also commonly include coverage for acts of war while at sea and strikes, riots, and civil commotion (SRCC) risks. In light of the current conflict, the majority of U.S. and London carriers have already issued a notice of cancellation in respect of war and SRCC risks for shipments into and out of Russia and Ukraine through the Black Sea and the Sea of Azov. While war and SRCC coverage in the region is still generally available, the risk has changed significantly, requiring an additional premium to reinstate the coverage. So far, clients are wisely opting to avoid doing business in the area rather than attempting to re-purchase the coverage.

In addition to cancellation of war and SRCC coverages, there is a more significant matter in the form of sanctions. Suppose underwriters can confirm coverage and compliance with current sanctions. In that case, there is no guarantee that a new sanction will not be issued and preclude underwriters from paying a claim. Russian-related sanctions have swiftly begun impacting all shipping industry segments, including tankers, containers, commodity traders, gas, and dry bulk goods. Restrictions have been applied to a wide variety of individuals and organizations, including oil companies, financial institutions, cargo owners, shipowners, service providers, port operators, shippers, receivers, and charterers, among others.⁸

In an effort to help clients protect themselves from the possibility of sanction violations, carriers are treading carefully when it comes to sanctions checking for their clients. Shipping companies can easily violate sanctions by making crew member payments through a sanctioned bank or paying for supplies, repairs, or services provided in-port to a Russian-managed vessel.⁸ At this time, virtually all clients are being advised to err on the side of caution and avoid business with Russia. Even if a client’s coverage is confirmed, sanctions can evolve or expand at any point during business operations, meaning an insured with a loss may not realize a new or adjusted sanction applies, resulting in non-payment of the claim as well as assessment of hefty penalties and fines not covered by insurance. Beyond the realm of insurance, violating sanctions may also result in additional secondary sanctions or criminal prosecution.⁸

BOTTOM LINE

The Ukraine-Russia crisis isn’t expected to end quickly or resolve without long-lasting economic consequences. Sanctions are likely to stick around for a long while. Doing business in Russia will likely never be the same, and all clients are advised to proceed with extreme caution when dealing with Russian-owned or managed entities for the foreseeable future. Clients will also need to partner with their shipbroker or shipowners to proactively communicate and confirm that they aren’t using vessels subject to sanctions. Agents should remind insureds about the Classification Clause in their policies to avoid potential issues.

The marketplace is monitoring the current situation in Ukraine. Southern Marine and Aviation (SMA) is a market leader with longstanding syndicate and company partner relationships in the London and U.S. markets, providing coverage for unique cargo and stock throughout risks. The SMA team is available to answer any question and encourages agents, brokers, or assureds, to reach out for help in understanding the potential consequences of business decisions regarding available coverage, premium costs, and sanctions.

CONTRIBUTORS

• Graham Jenks is a Senior Vice President and head of Southern Marine and Aviation, a Houston-based ocean marine cargo and stock throughput MGA working on behalf of Lloyds of London.

ABOUT SOUTHERN MARINE & AVIATION

Southern Marine & Aviation (SMA) is a marine insurance specialist headquartered in Houston, Texas. SMA underwrites various products and commodities on behalf of Lloyd’s of London and company markets. They specialize in Ocean Cargo, Stock Throughput, Stock/ Inventory Only, Excess Stock/Inventory, Inland/Domestic Cargo, Local Policies / Global Programs, Project Cargo/Delay in Start-Up, Deductible Buy Downs, Fine Art, and Terrorism products.

ENDNOTES

1. IACS Council Withdraws Russian Register’s Membership of IACS, IACS. https://iacs.org.uk/news/iacs-council-withdraws-russian-register-s-membership-of-iacs/
2. IACS Votes to Expel Russian Maritime Register, The Maritime Executive, March 13th, 2022. https://www.maritime-executive.com/article/iacs-votes-to-expel-russian-maritime-register
3. Russia Dropped From Ship Certification Body as Sanctions Bite, U.S. News & World Report, March 14th, 2022. https://www.usnews.com/news/world/articles/2022-03-14/russia-dropped-from-ship-certification-body-as-sanctions-bite
4. Russian Class Expelled from IACS, Lloyd’s List, March 11th, 2022. https://lloydslist.maritimeintelligence.informa.com/LL1140123/ Russian-class-expelled-from-IACS
5. Russian Sanctions Snarl Shipping Even as Pandemic Pressure Eases, The New York Times, March 11th, 2022. https://www.nytimes.com/2022/03/11/business/russia-ukraine-shipping-cargo.html
6. What is International Association of Classification Societies (IACS)?, Marine Insight, October 11th, 2021. https://www.marineinsight.com/maritime-law/what-are-international-classification-society-international-association-of-classification-societies-iacs/
7. Russia, Office of the United States Trade Representative. https://ustr.gov/countries-regions/europe-middle-east/russia-and-eurasia/russia
8. U.S. Sanctions on Russia: Impact on Shipping Business and Contractual Considerations, Holland & Knight, March 7th, 2022 https://www.hklaw.com/en/insights/publications/2022/03/us-sanctions-on-russia-impact-on-shipping-business
9. FACT SHEET: Joined by Allies and Partners, the United States Imposes Devastating Costs on Russia, The White House, February 24th, 2022. https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/24/fact-sheet-joined-by-allies-and-partners-the-united-states-imposes-devastating-costs-on-russia/